Chiding CEOs at Walgreens and Other Corporate Defectors

July 24, 2014

Richard Eskow

Walgreens is the pharmacy that, at least according to its website, can be found “at the corner of Happy & Healthy.” If its executives have their way, however, it may soon be found near the intersection of Ziegelackerstrasse and Untermattweg in Bern, Switzerland. By acquiring the much smaller Swiss company that is located near that corner, the American company can dodge millions in American taxes.

What would that mean for the 4,200 employees who work at Walgreens headquarters in Deerfield, Illinois? Probably nothing, as Deerfield’s local newspaper (a branch of the Chicago Sun-Times) explains. “Inversion,” as these maneuvers are called, doesn’t actually mean a company moves anything. Like the Panamanian flag fluttering on a second-class freighter, all it tells you is that a vessel for hire has found a new and more compliant registry.

Call it the “Inversion Evasion.” Walgreens would become a “Swiss company” for tax avoidance purposes only. The combined corporation would do a small percentage of its business there. In all other respects, however, the corporation would remain fully American – headquartered here, making most of its profits here, and continuing to use its lobbying dollars and campaign money to distort the American political process. (Michael Hiltzik of the Los Angeles Times has more detail on the process.)

All of which raises the question: How does it feel to be the CEO of a “defector corporation”? Do such executives face the opprobrium of society as they continue to frequent fine dining establishments and enjoy the fruits of this land that has given them so much?

So far, apparently not. But that may be changing. The inversion trick hasn’t received much public attention, but it’s quickly moving into the spotlight. Illinois Sen. Richard Durbin has already written a letter suggesting that Walgreens could become the subject of a boycott it if decides (“pretends” might be a better word) to become a Swiss corporation.

Durbin couldn’t resist a jab at that “corner of Happy & Healthy” slogan either. That’s just the latest of many Walgreens tag lines, including “Be well” and “The pharmacy America trusts.” (Write your own joke, as Ed McMahon used to say.)

So far these moves have taken place under the public’s radar. But “defector CEOs” may be beginning to feel the heat. That’s usually when they call on cooperative (if not downright obsequious) journalists like Andrew Ross Sorkin of the New York Times. Sorkin’s phone must have rung recently, because he has dutifully inflated and set aloft a puff piece on behalf of Heather Bresch, the CEO of a pharmaceutical company called Mylan and the daughter of United States Sen. Joe Manchin of West Virginia.

The headline given to Sorkin’s piece reads “Reluctantly, Patriot Flees Homeland for Greener Tax Pastures.” That’s a droll and inventive formulation that can be applied to many situations, as in: “Reluctantly, Loving Husband Flees Wife for Younger Woman.”

Sorkin credulously reports that Bresch loves her country and “left” it (there’s no evidence she’ll physically relocate) with great regret, a rhetorical inversion that was received with mordant amusement in knowledgeable quarters. Bresch is unable to mount a coherent defense for her actions, despite Sorkin’s tender ministrations. The usual “taxes are too high” trope is dug up, but when pressed by Sorkin she’s unable to name a tax rate that would persuade her to keep the company in the U.S.

Maybe that’s because she doesn’t have a real complaint. Statutory corporate tax rates – that is, the “official” rate – are high in the United States, but the actual rate paid by corporations is quite low. It’s just that there will always be a country out there willing to charge a little less, no matter how low our rates, in return for the chance to channel some funds out of the U.S. economy.

The policy choice is simple: Either end “inversions” or be condemned to an endless race to the bottom on tax rates. That’s a race the American people are doomed to lose.

Mylan and Bresch defected for an initial gain of 4 percent on Mylan’s tax rate, according to Bresch herself, with the expectation that this advantage will roughly double in future years. (Bresch told Sorkin that Mylan’s rate would drop from 25 percent to 21 percent and then to the “high teens.”)

For that, Bresch and her colleagues are prepared to renounce their corporation’s American “citizenship.” (If corporations are “persons,” as is the current legal fiction, they’re certainly not very loyal ones.)

Now Walgreens seems poised to join that list. Walgreens CEO Greg Wasson unashamedly told analysts on a recent investor call that the company is actively exploring use of the inversion tactic. Like virtually all CEOs, Wasson is highly compensated. And, like most of them, he collects that compensation even when he has a very bad year. From the looks of things, he also shares with his peers a certain lack of patriotism.

What do Americans, especially older Americans, picture when they think of Walgreens? A 1950’s-style corner drugstore, perhaps. A luncheonette counter, some stools, maybe a gleaming blender for whipping up milkshakes …

But today’s Walgreens is a $72 billion enterprise, and a quarter of that income comes directly from the American taxpayer through Medicare and Medicaid programs. (See Americans for Tax Fairness/Change to Win for more on Walgreens.)

And when Americans think of Swiss corporations, they may think of multinational banks, or watches, or fine chocolate. They probably aren’t picturing the pharmacy that sells them aspirin, shampoo, and prescriptions. They’re certainly not likely to imagine a corporation that earns its wealth from American customers, profits from American government programs, and delivers its products over American roads – all while scheming to evade American taxes.

In some ways the Walgreens case is even more objectionable than Mylan’s. Walgreens would immediately have a tax advantage over its competitors. At least Heather Bresch can claim that “We were one of the last ones in our sector to do this … If you put on your business hat, you can’t maintain competitiveness by staying at a competitive disadvantage.”

Greg Wasson can’t even say that.

That’s not to defend Mylan. Pharmaceutical companies benefit from government research, government rules, and government reimbursement. But the first Walgreens was opened in 1901 at the corner of Bowen Avenue and Cottage Grove in Chicago, Illinois. If that’s not an American company, what is?

If Mylan is a story of greed, Walgreens – provided it goes through with its Swiss plans – is a story of betrayal.

Bresch is right about one thing: CEOs who put on what Bresch calls their “business hats” – which is, after all, their fiduciary responsibility – will continue to find this form of “silent defection” extremely attractive. The end result? Executives whose companies were born of American ingenuity and which make their profits from American customers (including the government) will nonetheless be obliged to troll international waters for opportunities in low-cost tax havens.

And then they’ll defect.

“Inversion,” a loophole born of backroom dealing in lobbyist-infested Washington, can be fixed. It was legislated into existence and it can be legislated away. There are proposals to do exactly that from Sen. Durbin and Sen. Carl Levin, among others. In a rambling phone interview with Ron Fournier of the National Journal,Sen. Joe Manchin argued for outlawing defections like the one his daughter led for Mylan, and also suggested it should be illegal for non-American companies to sell pharmaceuticals to Medicare and Medicaid.

It’s time for Congress to call our nation’s errant businesses back home. In the meantime, we need to call out their CEOs for behavior that amounts to disloyalty and moral turpitude. “When I run into their executives,” said Durbin of defecting companies, “I chide them.”